In the current economic climate, knowing how to reduce tax on UK savings is key to making your money go further and maximising your savings. This guide will explain the current UK tax rates and allowances that apply to savings and provide some practical tips on how to reduce tax on UK savings. No matter how much you have saved, making sure your savings are tax efficient is a great way to boost how much you have saved.
If you want to discuss tax optimisation strategies and how to reduce the tax on your UK savings further, please contact us at Expat Tax Solutions.
How Are My UK Savings Taxed In 2025/26?
Tax Rates and Thresholds
Savings income such as UK bank interest is UK taxable income and is taxed at the same rates as non-savings income (employment income, rental income etc.) The 2025/26 rates are:
| Band | Taxable income | Tax rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | £12,571 to £50,270 | 20% |
| Higher rate | £50,271 to £125,140 | 40% |
| Additional rate | over £125,140 | 45% |
The above thresholds apply to your total taxable income and therefore, if you also have other sources of UK taxable income (self-employment income, rental income, dividends etc.) or are also employed, all of your UK taxable income must be considered to determine the tax rate applying to your income.
Understanding your applicable tax rates and thresholds is a vital step in learning how to reduce tax on UK savings.
How To Reduce Tax on UK Savings With The Personal Savings Allowance (PSA)
In addition to the tax rates and thresholds above, most individuals are entitled to the Personal Savings Allowance (PSA) which is a rate band at which savings income is taxed at 0%. The amount of PSA you are entitled to depends on your total UK taxable income as follows:
- Basic rate taxpayers are eligible for a £1,000 PSA
- Higher rate taxpayers are eligible for a £500 PSA
- Additional rate taxpayers are not eligible for a PSA
Therefore, if you are a basic rate taxpayer (an individual with UK taxable income less than £50,270), you can receive up to £1,000 of bank interest each tax year without paying any tax. Bank interest in excess of the PSA will be taxable at your marginal rate of tax.
Assuming an interest rate of 5%, basic rate taxpayers can therefore have up to £20,000 in savings generating income of £1,000 per year before paying UK tax. Higher rate taxpayers can have up to £10,000 in savings generating income of £500 before paying tax, and additional rate taxpayers are subject to tax on all of their taxable savings income at 45%.
Higher interest rates and a relatively small PSA mean that learning how to reduce tax on UK savings is now more important than ever. By making your savings tax efficient, you can ensure more of your income is kept in your pocket rather than paid to HMRC.
How To Reduce Tax on UK Savings With The Starting Rate For Savings
If your non-savings income is less than £17,570, you may be eligible for the Starting Rate For Savings which allows you to earn up to £5,000 of interest income without paying tax. You are only eligible for the Starting Rate For Savings if your other income (employment income, pension income, rental income etc.) is less than £17,570 and the total amount of the Starting Rate For Savings (£5,000) is reduced by £1 for every £1 by which your other income exceeds the Personal Allowance of £12,570.
For example, if you have employment income of £15,000, this exceeds the Personal Allowance by £2,430 (£15,000 – £12,570). Your Starting Rate For Savings is therefore reduced by £2,430 and you can receive £2,670 (£5,000 – £2,430) of savings without paying UK tax.
This can be combined with the Personal Savings Allowance such that you can receive up to £6,000 of savings income without paying UK tax.
This relief typically applies to individuals with relatively low incomes and a high proportion of their income coming from savings i.e. pensioners receiving a modest pension income but with large savings.
How To Reduce Tax on UK Savings By Choosing Tax Free Investments
If you expect your savings income to exceed your Personal Savings Allowance such that UK tax is due, you should consider the following tax free alternatives to reduce tax on your UK savings.
Individual Savings Accounts (ISAs)
An ISA is one of the most effective tools for anyone wondering how to reduce tax on UK savings, since all income and growth inside an ISA is tax-free. An individual can contribute up to £20,000 per tax year across all of their ISAs making them an attractive investment option for individuals looking to reduce the tax on their UK savings. UK tax non-residents are not eligible to open new ISAs or contribute to existing ISAs.
One feature to be mindful of is whether the ISA is a Flexible Access ISA. These ISAs enable you to make withdrawals without this counting towards your £20,000 annual limit. For example, if you contribute £20,000 to a Flexible Access ISA in a year and then withdraw £5,000, you are able to re-contribute up to £5,000 in that tax year without exceeding your ISA limit. If the ISA was not flexible, the £5,000 withdrawal would not count towards your limit and you would not be able to contribute further to the ISA as you have reached the £20,000 limit with the initial contribution.
There are many types of ISA and the main ones are explained below.
Cash ISAs
Cash ISAs are essentially savings accounts which have the tax-free ISA status. They may be fixed rate ISAs which require you to keep the money locked away for a set period of time, or easy access ISAs which allow you to withdraw from the account at any time.
Cash ISAs sometimes have lower interest rates than non-tax protected savings account however this is not always the case and some of the best cash ISAs available now are included in this guide. In addition, the tax savings on the ISA account can make them optimal over regular bank accounts even with a lower interest rate.
Stocks and Shares ISAs
Stocks and Shares ISAs are investment accounts that benefit from the tax-free ISA status. As such, any interest or dividends paid on the assets held in the ISA are tax free and any capital gains realised from selling stocks and shares are also tax free.
You can opt for a fully managed stocks and shares ISA where a fund manager determines the investments or you can choose your own investments if you are an experienced investor.
Lifetime ISA (LISA)
A Lifetime ISA allows you to save up to £4,000 per year until you are 50, and you must make your first payment into the LISA by the time you are 40. The main incentive of a LISA is that the Government will pay a 25% bonus on the value of the LISA when you make a qualifying withdrawal. You will pay a 25% charge if you want to access the funds in any way that is not a qualifying withdrawal.
Qualifying LISA withdrawals are:
- Withdrawals to buy your first home
- Withdrawals when you are aged 60 or over
- Withdrawals if you are terminally ill with less than 12 months to live.
When using a LISA to buy your first home, all of the following must apply:
-
The property must cost £450,000 or less
-
You buy the property at least 12 months after you make your first payment into the Lifetime ISA
-
You use a conveyancer or solicitor to act for you in the purchase
-
You buy with a mortgage
Any interest or growth on the funds while they are within the LISA are also tax free.
Given the withdrawal penalty, consideration should be given as to whether you are likely to meet the qualifying withdrawal conditions and whether you are willing/able to not be able to access the money until that time.
Junior ISA
Junior ISAs are long-term tax free savings accounts for children. Your child must be under the age of 18 and live in the UK to qualify for a Junior ISA. A parent can contribute up to £9,000 per year to their child’s Junior ISA and, while the parent can open and manage the account, the money within belongs to the child. The child can take control of the account when they are 16 but cannot withdraw the money until they are 18.
Junior ISAs are therefore useful to start tax free savings accounts for their children however care should be given as the funds will be locked away until the child turns 18.
Personal Pension Schemes/Self Invested Personal Pensions (SIPPs)
Personal pensions are another way to think about how to reduce tax on UK savings over the long term as they offer attractive tax efficiencies however the funds cannot be accessed until retirement. In addition to the growth of the pension fund being free from tax, HMRC will also pay a basic rate tax bonus into the scheme. The bonus is calculated as the basic rate tax (20%) due on the ‘grossed up’ value of the contribution.
I.e. if an individual makes an £800 contribution to their personal pension scheme, this is equivalent to £1,000 before basic rate tax at 20%. HMRC will therefore top up the pension scheme with an additional £200 such that basic rate tax relief is obtained.
A useful rule of thumb is that HMRC’s bonus will be equal to 25% of the contribution made by the individual.
If you are a higher (40%) or additional rate (45%) taxpayer, you are entitled to additional relief as your marginal tax rate is higher and this is obtained via submission of a self-assessment tax return by extending your basic rate tax band by the grossed up value of the contributions.
Consideration should be given to your Annual Allowance which is the total amount of pension contributions an individual can make during the year while still receiving UK tax relief. The Annual Allowance for 2025/26 is £60,000 however it is reduced for individuals earning over £200,000.
There are also limits on contributions for non-residents who do not pay UK tax and these individuals are only eligible to contribute up to £3,600 gross (£2,880 net) per year to a personal pension scheme.
NS&I Premium Bonds
Premium Bonds are a tax free investment where the income each month is not fixed and is instead paid via a prize draw and can therefore also play a role in your strategy for how to reduce tax on UK savings, since all prizes are tax-free.
The minimum investment is £25 and the maximum amount that can be held is £50,000. Each £1 bond represents a monthly entry to a prize draw with the maximum prize being £1million. NS & I advise that the current expected return on investment is 3.6% which is lower than what can be achieved via a typical savings account however all prizes are tax free and the added incentive of a potentially large win makes this an attractive investment option.
Anyone over the age of 16 with a UK bank account can invest in premium bonds. The bonds must be held for a full calendar month to be eligible for next month’s prize draw and therefore the funds are not locked away for a significant period of time.
Further details can be found at NS&I’s Premium Bond page here.
How Will I Pay Tax on my Savings Income?
HMRC have visibility over your savings income and therefore if you are subject to tax, you will typically receive correspondence from HMRC confirming the amount due.
This will be collected in one of three ways:
- HMRC may request immediate payment of the amount due
- HMRC may factor the underpayment into your tax code such that additional tax is withheld from your employment income
- HMRC may require you to file a UK self-assessment tax return
HMRC will require you to file a UK tax return if you received more than £10,000 from savings, investments and dividends. Knowing whether you need to file a tax return is key to ensuring that your obligation is met on time and you are not subject to penalties and interest and knowing how to reduce tax on UK savings can also prevent you from being required to file tax returns. You can check whether you need to file a tax return here.
Easy Tips For Reducing Tax on UK Savings
If you are wondering how to reduce tax on your UK savings, considering your total expected savings income for the year and whether you will exceed your Personal Allowance is the first step. If you are taxable on your savings income then consider moving some of your investments to tax efficient options such as ISAs, personal pensions and Premium Bonds. Your current circumstances and how long you are willing to lock away the money are important factors in determining which investments are right for you.
Shopping around for the best rates is one of the simplest ways to boost your returns. Combined with strategies on how to reduce tax on UK savings, such as ISAs, pensions, and Premium Bonds, you can maximise the value of your money while keeping your tax bill low.
- Chase currently offer an access anytime savings account with 4.5% interest for the first 12 months for new customers only. You also get 1% cashback on certain spending from their current account up to £15 per month.
- Skipton Building Society and Tesco all offer flexible access anytime cash ISAs that pay over 4% in interest.
By understanding your allowances and choosing tax-efficient investments, you’ll know exactly how to reduce tax on UK savings and keep more of your money working for you.
How To Reduce Tax on UK Savings FAQs
How to reduce tax on UK savings legally?
You can reduce tax on UK savings by using ISAs, making the most of your Personal Savings Allowance, or splitting savings with a spouse to double allowances.
How does the Personal Savings Allowance help reduce tax on UK savings?
The Personal Savings Allowance lets basic rate taxpayers earn up to £1,000 of savings interest tax-free each year, which directly reduces tax on savings.
What are the best investments for how to reduce tax on UK savings overall?
The most tax effective investments include using ISAs, pensions, and Premium Bonds.
Do I need to declare interest when trying to reduce tax on UK savings?
In most cases, banks and building societies report interest automatically. However, if your total income from dividends, savings and investments exceeds £10,000, you should file a UK self-assessment tax return.
Get Expert Help With Reducing Tax on UK Savings
If you want to reduce tax on UK savings, our experts can help. Schedule a free no-obligation consultation to receive expert advice from a Chartered Tax Advisor.